Another setback came for the Modi government as the Indian economy as first the RBI said that the bold move of demonetization did not work as the government planned and yesterday, the official GDP data showed that the growth rate declined to 5.7% for the March-June quarter. It was 7.9% in the same quarter period last year. The fall in growth rate in been noticed post-demonetization, and the government believes that it won’t impact the growth rate much. The former Prime Minister of India, Manmohan Singh, also predicted fall of two percent in the GDP growth rate following demonetization.
India had emerged as the fastest growing world economy overtaking China by the end of 2015 as in the first quarter of 2016 (January – March), the GDP was almost about 9.2 percent, which was extraordinary. This also opens the eyes of the Indian economy touching the double digit mark. However, after the January-March 2016 quarter, the GDP rate has been constantly declining. The GDP rate dropped to 7.9% in April – June 2016 quarter, a decline of 1.3 percent. It slipped further to 7.5 percent in the quarter ending September, demonetization was yet to enter. And the Demonetization hit the nation on November 8, between the September – December 2016 quarter, where we witnessed GDP growth rate falling to 7.0 percent. The first quarter of 2017 (January – March) witnessed 6.1 growth rate, a sharp fall of about 3 percent just after one year.
The famous economist Ajit Ranade said, “1 percent lower annual GDP growth = loss of 1.5 lakh crore national income and loss of millions of jobs.” Sadly, the manufacturing sector experienced the lowest growth rate in last five years. This sector reported the growth rate of 1.6 percent compared to 3.1 percent in the last quarter. The decline in the manufacturing sector is being connected with the Goods and Services Tax (GST). The government, however, publicized that the GST would be implemented from July 1 in advance of several months. It was announced to prevent any havoc situation in the transition process, but oppositely, most of the manufacturers started de-stocking during the period April-June.
According to a RBI report released in March this year, pointed to the fact that what was in the store for the manufacturing sector. The manufacturing sector also suffered from a fall in capacity utilization. The capacity utilization is a way of a measure of the amount to which productive capacity of a business is used. In a simple way, it’s the percentage of the whole capacity of the business entity actually achieved over a given period of time. The average quarterly capacity utilization rate was at 71 percent for the last three-quarters, the RBI report said. Calculated on the basis of production output of around 1300 manufacturing firms of which 952 were owned by the government or through the major share in the PSUs, the capacity utilization was figured out.
The capacity utilization witnessed a huge fall over last five years. The decline in the capacity utilization leads to decrease in investment, which slows down the economy. Adding to it, the decline in manufacturing also impacts in a decline in demand in the domestic and foreign markets. However, the Finance Minister Arun Jaitley stated that he is expecting the annual GDP growth rate to be around 7 percent. The fall in domestic demand is followed by a rise in the NPA, the non-performing assets. The banks, as well as the companies, have witnessed an increase in assets that have turned loss-making for them.
The Indian government has been focusing on reducing public expenditure to manage the fiscal deficit. But it has affected in on the whole decline in investment. There are some reports that have shown that the investment rate in India is at its lowest in 10 years. Due to low investment, it badly slowed down the growth of transport, infrastructure and health sectors, which are the biggest job providing sectors. Loss of employment was the biggest concern after the demonetization. Talking about the estimates, Demonetization impacted the unorganized sector growth rate by 80 percent, which also becomes a big reason behind the loss of lakhs of jobs. These signs of the economy clearly indicate that India’s economy is heading again towards another phase of slowdown. On the other hand, the elections are hardly two years away, so one can expect a huge increase in the public expenditure.
It is expected that the government will take some decisions to push health, infrastructure, education, manufacturing, and transport sectors in the coming months. The Finance minister Arun Jaitley, on the other hand, said that he is expecting the annual GDP growth of 7 percent on expected public spending, which looks quite impossible as of now.